Rwanda - Energy Sector Rehabilitation Project

Documuit of The World Bank FOR OMCLAL USE ONLY Repwt No. P-5894-RW MEMORADUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVLOPMENT ASSOCIATION TO THE ECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 18.5 MLLION TO THE REPUBLIC OF RWANDA FOR AN ENERGY SECTOR REHABILITATION PROJECT Januawy 13, 1993 MIC ROFICHE COPY Report No. :P-- 5894 PW Type: (PM) Titl]e: ENERGY SECTOR REHAPILITAT ION E' Author: SENOU, B Ext. : 34003 Room:J7060 Dept.. :AF3IE Ti document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EOUVALENTS Currency unit = Rwandese Frunc (RWF) 1992 US$1 8 RWF 125 (lst semeser) 1992 USS1 = RWF 140 (effectiv June 1992) WEIGHTS AND MEASURES KIometer (kn) - 1,000 m or 0.62 miles Kilovolt OmV = 1,000 volb Kilovolt ampere (kVA) = 1,000 volt ampere Kilowatt (W) = 1,000 wats Kilowalt hour (kWh) = 1,000 wat hour Gigawat hour (GWh) = 1 millon klwatt hour (kWh) Megavolt amper. (MVA) = 1,000 kllovolt ampere (kVA) Megwat (M = 1,000 kilowats (kW Nw3 1 Normal cubic meter (C 25 C, 1 atmosphee) 1 ton of Oil Equalent (TOE) 10,500,000 klocalories or about 7.5 bbl of crude oil 1 kiloam (kg) 2.2 pounds (lb) liter (I) = 0.26 US gallon (gal) metric ton (m ton) 2,204 pounds (lb) I banrd (bbl) = 0.16 cubic mtes 1 imperial gallon (G) = 1.2 U.S. gallons GLOSSARY OF ABBREVIATIONS CCCE = Caisse Cenl doe Cooprtion Ewn u (Frenh Aid Agency) EB Euopean Investment Bank PLLCTROGAZ = Etablissemnt Public de Producion de Transpot et de Distribution de lEau, d ert et de Gaz (Rwandese Utity Company) LRMC Long Run Marginal Cost PCAU = Proje Coordination and Administration Unit PE = Public Enterprise J ISCAL temr Januar I to December 31  FOR OMCIL USE ONLY OF RWANDA CREDT AND PROJECT SUIMMARY Borrower: Republic of Rwanda. Beneficary: ELECTROGAZ (the national public utility). Amount: SDR 18.5 million (US$26 million equivalent). TAms Standard IDA terms, with 40 year maturity. On-lending Terms: US$13.44 million of the Credit would be onlent to ELECTROGAZ for 25 years, including a 5-year grace period, at the prevailing IBID interest rate plus 1 % commission. The Government would bear the forein exchange risk. Financudf Plan: US$ Million IDA 26.00 European Investment Bank (EIB) 7.92 French Aid Agency (CCCE) 2.71 Government 2.32 38.95 Economic Rate of Return: Physical Investments: 19 percent. Staff Anpraisal Report: No. 11241-RW. :. MIBRD 24218 and 24292. This document has a restricted distribution and may be used by recipients only in the perf.rmance of their official duties. Its contents may not otherwise be disclosed without World Bank auti dtir7i:.on.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTER1ATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTE DECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF RWANDA 1. I submit for your approval the following report and recommendation on a proposed development Credit to the Republic of Rwanda for SDR 18.5 million, the equivalent of US$26 million, on standard IDA terms with a maturity of 40 years, to help finance an energy 5ector rehabilitation project in Rwanda. The European Investment Bank (EEB) and the Caisse Centrale de CoopEration Economique (CCCE) are also providing coordinated financing for US$7.92 million equivalent and for US$2.71 equivalent, respectively. US$13.44 equivalent of the proposed Credit would be onlent to the national electricity, water and gas company (EL1CTROGAZ) for 25 years including 5 years grace period at the prevailing IBRD rate plus 1% commission, with the Government bearing the foreign exchange risLk The Government has proposed to use up to US$1.3 million (or 5% of the total credit) for advance procurement and retroactive financing of essentia consulting services for preparing the contractual arrangements for the restruering of ELECTROGAZ. 2. Cnmka Badkwoun. Rwanda, a small landlocked country with a total population of about 7.5 million increasing at an annual rate of 3.7%, is the most densely populated country in Africa (290 people per kn2). GDP per capita, estimated at about US$310 (1991), ranks among the lowest of the continent. Some 95% of the population lives in nural areas and derives its livelihood from subsistence agriculture and the cultivation of coffee and tea. From 1970 to the mid-1980, Rwanda experienced financial stability, low inflation and sustained growth (averaging 4% per annum). Since early 1987, it has been faced with precipitous declines ia world coffee prices and unfavorable climatic conditions which had an adverse Impact on agricultural production. As a result, the 1989 real income per capita dropped by almost 16.5% from its 1986 level. The initial policy response to adverse economic developments was not appropriate and serious internal and external imbalances and declining per capita income persisted through the end of 1990. 3. To correct these economic imbalances, the government embarked in 1990 on a comprehensive economic reform program, supported by the first adjustmet operation approved in June 1991. The government's program includes a comprehensive package to strengthen macroeconomic manaement, create an incentive framework to stimulate exports and enha private sector confidence, reform Public Enses (PEs), improve public penditme management, increase the efficiency of the financial sector, liberalize the labor market and implement well-targeted measures aimed at alleviating poverty. The project described in this report is an importat element of the gov ene's economic restructurin program. 4. Seor Bmkoud. lhe energy situation in Rwanda is dara ized by a high reliance on three sources of energy: woodfuels, agricultura by-products, and imported petroleum products. A dominant share of enemr (almost 90%) is supplied from biomass (woodfuels and crop residues) and households are the main consumers of energy (close to 90%). Energy (electricity and petroleum products) absorb about one third of the country's foreign exchange earnings. The potential for hydroelectric power exists but development is costly because the sites are widely scattered and have low storage capacity. The best hydro sites are the Kagera and Ruzizi rivers at the border of Rwanda with Tanzania and Zaire respectively.  -2 5. The woodfuel resources are subject to depletion resulting In environmental concerns for certain areas of the country where demand for woodfuels has outweighed sustainable supply. Even at the ambitious pace of reforestation depicted in the Government's National Forestry Plan, the gap between demand and sustainable supply will continue to grow. It is estimated that the total deficit by year 2002 would more thin double that of 1987. In addition, charcoal making is inefficient, resulting in wasting more than 80% of the energy in the process of carbonization. Taxes on petroleum producXt in Rwanda are amorgst the highest in the region, accounting for more than 50% of the pump price. This level of taxation has created a strong incentive to smuggle fuel into Rwanda. With the high level of petroleum product prices, the Government is considering exploration of methane gas. Rwanda has large quantities (about 60 million Nm3) of this resource, trapped in the deep waters of Lake Kivu. Large-scale development, however, should take into account environmental consequences. Development of solar energy requires a strategy for its dissemination, including proper mechanisms to ensure acquisition of the home solar systems at affordable cost. 6. in the power subsector, ELECTROGAZ, the national electricity, water and gas company, is currently facing financial and operational difficulties due to management and tariff policy shortcomings. The authority of its management team in personnel policy and tariff setting has been undermined by government intervention. Its involvement in planning and execution of power network investments is practically limited to distribution. Government arrears, which amounted to 32 months of sales at the end of 1991, have also contributed to eroding its autonomy and financial viability. On the operations side, ELECTROGAZ has three sources to satisfy the internal demand of electricity: (a) the domestic plants; (b) the part of Ruzizi UI's regional power to wl-ich Rwanda is entitled, and (c) any Zairian and Burundian surpluses. In 1990, 51% of Rwanda's electricity requirements of 174 GWh were satisfied with energy produced at Ruzizi IL and 4% were imported from Zaire's Ruzizi I. 7. Ihe Government's response to al these issues, which is reflected in an Energy Sector Policy Statement places emphasis on: (i) adoption of least cost solutions for investments in the sector; (ii) regional cooperation; (iii) regeneration and expansion of the potential for fuelwood production; (iv) improved efficiency in the production of electricity and water, of charcoal and the use of woodfuels; (v) identification of alternative competitive sources of energy such as peat, biogas; (vi) rehabilitation of key power infrastructures; and (vii) extension of electricity supplies to rural areas and to cottage industries. In a key step towards helping achieve these objectives, the government has agreed to contract out with a private operator the operations of ELECTROGAZ, the utility company. In addition, it has decided to (i) strengthen the legal framework, investnent planning and coordination and control for sector institutions; (ii) set tariff policy for electricity, water and gas in a manner consistent with the Long Run Marginal Cost (LRMC); (iii) implement a major staff reduction plan within ELECTROGAZ; and (iv) promote rational pricing policies for wood, charcoal and petroleum products while addressing environmental implications. B. Poect Objectives. The overall objective of the proposad project is to help the Government implement its strategy as described above. Specific objectives are: (i) create an appropriate enabling legal and regulatory environment; (i) enhance the efficiency of ELECTROGAZ operations; (iii) provide technical assistance and training to key sector institutions to build up investment planning capacity, and strengthen government capacity to formulate a coherent sector policy and to monitor sector activities including those related to petroleum products; (iv) provide least-cost power supply alternatives for rura areas; and (v) rehabilitate some key power infrastructure. The general rule would be that the Government establishes the policy environment, but commercial decisions are left to private economic agents.  -3- 9. Proect Desiption. The main features of the project are summarized as follows: (a) Strengthbening of the Institutional Regulatory and Policy Mnvironment through: (i) restructuring ELECTROGAZ to permit contracting out its operations to a private operator; (ii) conulting services to: prepare new statutes for the utility and bidding documents for the selection of the private operator, and to Implement its contracting under a lease' type contract; (iii) implementation of a series of make-ready" measures in order to attract qualified private operators; (iv) introduction of incentives to rationalize and improve the efficiency of the charcoal subsector; (v) implementation of environmental and technical guidelines for future development of Lake Kivu's methane gas by private investors; (vi) studies to design and implement a strategy for solar home systems as a cost efficient alternative for electricity in the rural areas; and (v) implementation of a reform of the pricing and taxation of petroleum products; (b) Rehabilitation and Improvement of Key Power Infrastructure: (i) rehabilitation and extension of the distribution network for five cities; (ii) improvements in the transmission network substations; (iii) overhaul of hydro power station, and of the hydraulic structures; (iv) feasibility strtdies for hydroplants; (v) constitution of a reserve stock of spare parts for plants and substations; and (vi) capacity building in the area of project management, training through scholarships and strengthening of the investment planning and monitoring capacity of the utility staff. 10. Project Imglementation. A Project Coordination and Administration Unit (PCAU) will be established, as a condition of Credit effectiveness, within the Ministry of Public Works and Energy as the main counterpart for discussions with the Bank. It will be headed by the Director General of Energy and incl -de one representative from each implementing agency. It will also be responsible for the establishmen of a woodfuel consumption database, for the coordination, implementation and supervision of the solar energy strategy, and for the methane gas activities. Other agencies will be responsible as foUows: Ministry of Agriculture, for the preparation and execution of the charcoal component; Ministry of Commerce, for the implementation of the reform of taxation and pricing of the petroleum products; and ELECTROGAZ, for the rehabilitation and extension of the distribution network for Kigali, Butare, Gisenyi, Ruhengeri and Nyabisindu and the rehabilitation of the power substations and transmission network. 11. Proposed Insfftutional Reform and Policy Measures. The new institional framework for the power sector under the proposed project would include (i) limiting the role of the Government to formulation of the sectoral policy and strategy and to regulatory oversight; (ii) separating ownership of assets and sector development planning responsibility from operations and mainenance through the establishment of two companies; and (iii) enabling legislation and corporate statutes for these companies to take over these responsibilities respectively, while providing them with freedom to recruit and fire and set incentive-based salary levels, and (iv) opening the composition of the Board of the asset holding company to include more private sector agents, and enabling it to be more involved in key policy decisions including tariff setting. 12. For staffing and personnel, the proposed project will support the Government's decision to reduce ELECTROGAZ' staff by 69% before the taking over of the utility operations by the private operator. The Caisse Centrale de Cooperation Economique (CCCE) has agreed to cover the cost of severance payments estimated at RWF 261 millio!. A successful i-mplementation of the proposed operation would also require strong govermnent commitment and cooperation in promptly setdtg its bills and setting appropriate tanff policy. Under the proposed project, Government would rationalize its electricity and water consumption, and pay its bills within 60 days and a systematic power cut policy for all consumers including Government agencies would be implemented. Agreement was reached during  -4- negotiations on an action plan, including appropriate annual tariff increases to reach the LRMC by June 30, 1995. As a fist step, average tariffs for electricity and water were raised by 15%, effective January 15, 1993, and would be raised by an additional 15% on April, 15 1993. 13. PWroec Sustalnablllty. Tbe separation of the regulatory function of the State from the management and administration of the utility is a necessary first step in establishing the basis for efficient operation of the electricity and water sectors. The Involvement of a private operator as well as the legal and regulatory refoas complement the capacity building initiatives to improve the management and operation of ELECTROGAZ and provide an adequate foundation for sustainable activities in the sector. Ihe financial viability of the utility will be enhanced by a tariff policy aimed at establishing a self- financing and autonomous sector capable of covering its investment program needs. The rehabilitation of the distribution and transmission lines included in the project will allow the conveyance of low-cost hydropower to the main population centers of Rwanda and will increase the quality of electric services over the medium- and long-run. For the woodfuel component, the proposed project will help the Government establish a self-financing program through allocation of revenues from the tax on charcoal transport to improve efficiency in wood use and charcoal production and consumption. 4. LeSsonS from Previous Projects In the Sector. The proposed project has been designed t ing into account the lessons from completed regional power projects. Among others, the following aspects prominendy figure in the project: (1) the autonomy of the utility company, (ii) human resource development, (iii) involvement of a private operator, (iv) comprehensive procurement packages, (v) automatic adjustment for electricity, water and gas tariffs, and (vi) coordination of donors' activities. In addition, lessons from the Power I Project incorporated in the project include: (i) the adoption of a Sector Policy Letter and of conditionalities not fully met under the previous project as up-front measures, Qi) establishment of high-quality standards and monitoring arrangements for consultant and contractor performance, and (iv) reinforcement of the utility's planning capacity. 15. Bank Groug Strake and Rationale for )DA 1nyolvement. The proposed operation fits well the Country Assistance Strategy for Rwanda, which was discussed with the Executive Directors on June 17, 1992. Through its policy advice, lending, and economic and sector work, the Bank is giving high priority in Rwanda to: (i) supporting the country's adjustment process; (ii) developing an incentive structure for private sector investment; (iii) reducLig the role of the state and improving public resource management; (iv) developing human resources, building local capacity, and alleviating poverty and (v) fostering improved management of natural resources, while protecting the environment. Reforms in the energy sector would help expand the role of the private sector through its increased participation in key sector institutions including ELECT*OGAZ; introduce rational investment and expenditure programming for the sector, through continued dialogue and support for highest priority investment program; assist in refrming the taxation and pricing structure for the petroleum products; and help improve the management of available energy resources and foster environmentally sound economic development and growth, through adoption of rntional use of existing woodfuel resources, and of small-scale approach for future development of Lake Kivu's methane gas and of least-cost power supply to rural areas. IDA's involvement is further needed to assic: in coordinating donors' actions. Finally, IDA would help ensure that the institutional arrangements and policy measures are the most appropriate to attract the maximm number of experienced operators and that the interests of the Government and the consumer are also preserved. 16. AgMd Actions. The conditions of Credit effectivene include: (a) execution of the subsidiary loan agreement between the Government and ELECIROGAZ; (b) establishment of the PCAU and appointment of the key staff; (c) launching of bids for the selection of the professional private  operator; (d) implementation of all necessary measures by customs agents to stop the smuggling of diesel at border posts; (e) submission by Government of a proposal satlsf3ctory to IDA on a new tariff structuWe except for customers using up to 40 kWh per month, and its implementation; (f) submission of evidence of the implementation of the Ministerial Decree establishing the details on charcoal transport taxation including its collection through the National Forestry Fumd; (g) confirmaion by Goverment of a satisfactory financing plan for the project and submission of evidence that ELECrROGAZ has taken all necessary measures to bring and thereafter maintain its staff number at a level not to exceed 1,253 ensployees; and (h) increase in average electricity and water tariffs by 15 percent. The following would be conditi of disbursement: (a) for the rehabilitation and extension of the distribution networks: issuance of the law establishing the regulatory and institutional framework for PEs; signature of the lease contract with the private operator; enactment of the statutes and functions of the asset holding company, and appointment of its Board members; (b) for the petroleum products component: transfer of responsibilities for managing the petroleum stordge depots from a Government majority-owned petroleum company to a private company to be created and to be jointly owned by all the oil importers; and implementation of an action plan satisfactory to IDA for price liberalization and simplification of the taxation structure. Other agreements include: (a) annual preparation and implementation of the energy secWtor investment program satisfactory to IDA; (b) submission by the PCAU of satisfactory activity reports; (c) mid-term implementation review; and (d) key milestone dates for the implementation of ELECrROGAZ' privatization program: selection and staring of negotiations with the successfil professional private operator-August 31, 1993; and signature of the lease contract- before November 30, 1993. 17. Environmental Aspc. The Master Plan for charcoal supply is designed to counter environmental problems such ha deforestation and soil degradation resulting from over-cutting of trees. With the growing consumption of charcoal and the increasing urbanization, the management of wood resources as well as the implementation of wood use management plans at the vilage level (to be financed by proceeds from the tax on charcoal transport) would provide a better grasp on existing wood resources, help monitor their evolution, and ensure that the production of this major urban fuel is sustainable, while preventing deforestation. The design and implementation of a strategy for solar home systems involve no environmental risks. The proposed project would establish the ground rules for future development of the Lake Kivu methane gas. To this end, it would finance the design and implementation of a set of technical and environmental specifications. Additional measures include incorporatitn of an examination by the Government of any potential riparian issues in all terms of reference for sir.-eys and studies on future development of Lake Kivu's methane gas. 18. Program Objective Categories. The project will contribute to the fullowing categories: (i) public sector reform, through greater private sector involvement in the power sector, the new institutional structure and the capacity building components; (ii) basic infrastructure, through the rehabilitation of the transmission and distribution networks and the increase in the availability and reliability of electric power; and (iii) environmental protection through the wood fuel and methane gas components. 19. Proiect Benefits. The proposed project would help increase the reliability and cost- effectiveness of the electricity system and increase efficiency in the use of the country's energy resources. This would improve living and working conditions for business and household consumers in the major cities and in rural areas while alleviating deforestation problems, through (a) establishing the basis for the utility to become autonomous and commercily viable thus providing a more favorable business climate; (b) restoring an adequate and reliable supply of electricity to meet the unserved demand of the  -6- country; (c) ensuring adequate supply of energy resources in Rwanda over the medium- and long-term. lhe economic ratw of return for physical investments is 19 percent. 20. Proeet Risks. The physical risks are minimAl because rehabilitation of trnsmission and distribution network Is routine and would be carried out under well-known conditions. The other risks are mainly of managerial and institutional nature and include: difficulty of finding private operator willing to take over ELECTROGAZ' operations and government commitment to implementation of a long-term, stable corporate culture with the private sector piaying a key role in elWctricity and water. Upfront measuts including tariff increase and major staff reduction, as well as key principles to be embodied in the utility new statutes and functions, the involvement of a private operator in the management of the utility operations, and the program for implementation of financial objectives and capacity building reforms, would substantially reduce these risks. Political instability, and external shocks are other risks that could force the Government to deviate from the reform path and slow the implementation of investment projects. The progress so far in the national dialogue and recent peace agreements reduce these risks. 21. Reonuendat. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association md recommend that the Executive Directors approve the proposed credit. Lewis T. Preston President Attachments Washington, D.C. January 13, 1993  -7- Page 1 of 2 REEULC OWAF Db ENERG SECR REHABILITATUON PROIECT PRJECrT COST SUMMARY (IS$ miliein) Foreign Local Total X Foreign X Total Exchange ase Costs A. STRENGTHENING REGULATORY AND POLlCY ENVIRONMEMT 1. Inst. Reform Program for the Pow. Subs. 3.98 1.72 5.70 69.82 17.58 2. Rational. of the Urb. CharcoaL Supply 2.82 1.43 4.25 66.36 13.11 3. Solar Hone Systemo 0.18 0.08 0.26 70.00 0.80 4. Kivuws Methane Gas Future Dev. 1.20 0.13 1.33 90.00 4.10 5. T.A. Petroletu Sector LOk 0.00 0. 100.00 LA Subtotal 8.78 3.36 12.16 ?9.24 37.45 S. POWR MSyBECQ 1. Distribution Rehabilitation & Extension 7.13 0.88 8.01 89.02 24.71 2. Tranedassion Improvements 4.29 0.21 4.50 95.33 13.88 3. Hydro Plant Rehabilitation 2.09 0.31 2.40 87.08 7.40 4. Spares. 1Iaintenance Equipment & Tools 2.50 0.00 2.50 100.00 7.71 5. Technical Assistance & Training 0.00 0.87L_ 10.Q00 2.6 6. Feasibitity Studies Hydro 1.90 0.10 2.00 95.00 6.17 Subtotal 18.78 1.50 20.28 92.60 62.55 Total Baseline Costs 27.56 4.86 32.42 85.01 100.00 Physical Contingencies 2.85 0.50 3.35 85.04 10.34 Price Contingencies LA DAM 31 M.9 98 Total Prolect Cost 33.09 5.86 38.95 84.95 120.14  Schedule -A Pap 2 of 2 REVIC OF W ENERGY SECamR NMITLITAT1O PRJECT FINANCING PtA# IDA EIG CCCE Govat I AMount X Amount X Amunt X Amont X A. Institutinal Reform 3.92 58.61 0.00 0.00 2.71 40.50 0.06 0.89 B. Feauibility Studies 2.29 97.47 0.00 0.00 0.00 0.00 0.0* 2.53 C. Distribution Rehabitltation